HomeMost PopularBank of America: A Fascinating Opportunity for Investors

Bank of America: A Fascinating Opportunity for Investors

Actionable Trade Ideas

always free

Bank of America (NYSE:BAC) has recently experienced a significant decline in its stock price, making it an intriguing prospect for investors. Despite a 23% decline over the year, the stockโ€™s current downturn appears to be primarily influenced by treasury-related concerns that emerged in early October. The spike in long-term treasury yields led many investors to sell off stocks, particularly dividend stocks. However, Bank of America faces two unique treasury-related risks compared to other stocks that suffered during this period.

Key Facts to Consider

Firstly, Bank of Americaโ€™s dividend yield of 3.6% is less appealing as risk-free treasury yields rise. Secondly, the bank holds the largest amount of unrealized treasury losses among all American banks, amounting to approximately $100 billion, which accounts for 17.5% of the total unrealized losses at U.S. banks collectively.

Unrealized losses present challenges for banks as they impact liquidity. Recent events such as the collapses of Silicon Valley Bank and First Republic highlight the importance of sufficient liquidity for banks. Rising treasury yields enticed customers to shift their money into treasuries, leading to a withdrawal of deposits from these banks. However, the same yields that attracted depositors reduced the banksโ€™ own liquidity as treasury prices declined. Despite Bank of Americaโ€™s substantial unrealized losses, its liquidity remains superior to many of its peers.

The Misconception of Liquidity Issues

While critics argue that Bank of Americaโ€™s liquidity issues are insurmountable due to unrealized securities losses, the reality is quite different. Adjusting the value of BACโ€™s bonds down to fair value still leaves the bank with more liquidity than most other banks. Bank of America had $373 billion in cash, $800 billion in securities held at amortized cost, $697 billion in securities measured at fair value, and $1.88 trillion in deposits in its most recent quarter. Even after accounting for unrealized losses, Bank of America still maintains sufficient liquidity, covering over 56.9% of its deposits and boasting a 119% liquidity coverage ratio, surpassing regulatory requirements.

Comparing Bank of America to its closest competitors, JPMorgan (JPM), Citigroup (C), and Wells Fargo (WFC), further confirms its outstanding liquidity position, despite its stock suffering more significant losses. In terms of liquidity coverage ratios, Bank of America stands out as the most liquid bank. Additionally, the bank holds $373 billion in cash, which constitutes 20% of its deposits, further demonstrating its liquidity resilience.

The Bull Case for Bank of America

Now that we have addressed the misconception of severe liquidity issues, letโ€™s shift our focus to the bull case for Bank of America, analyzing its profitability, growth, and valuation prospects.

Profitability

In its most recent quarter, Bank of Americaโ€™s revenue amounted to $25.2 billion, reflecting an 11% increase, while net income reached $7.4 billion, representing a 19% increase. The bank achieved an 11.2% return on equity and a 15% return on tangible book value. These figures indicate that Bank of America is a highly profitable company, with a net margin of 29.3% during the trailing twelve-month (TTM) period.

Growth

Bank of Americaโ€™s growth trajectory is equally promising. In the TTM period, the bank experienced revenue growth of 5.6%, EPS growth of 8.8%, and return on equity growth of 5.11%. The five-year compound annual growth rates (CAGR) also support the bankโ€™s growth potential, with revenue growth at 2.5%, net income growth at 6.5%, EPS growth at 12.8%, and equity growth at 1.2%. Considering these growth rates, Bank of America appears to be an attractive investment opportunity.

Valuation

Looking at Bank of Americaโ€™s valuation, its current multiples present an appealing investment proposition. At present, the stock trades at 7.5 times earnings, 2.17 times sales, 0.81 times book value, and 4.6 times operating cash flow. While calculating book value using fair values instead of amortized costs slightly elevates the price/book ratio, it remains relatively low compared to market standards.

The Bottom Line: An Attractive Opportunity

Bank of America stands out among the Big Four banks for its liquidity and successful management. Despite trading at a lower price, Bank of America offers investors an exceptional opportunity due to its strong financial position. The marketโ€™s sole focus on the bankโ€™s unrealized losses has resulted in a mispricing of its shares. By analyzing the bankโ€™s risk and return profile, it becomes apparent that Bank of Americaโ€™s current valuation presents an attractive opportunity for investors.

Swing Trading Ideas and Market Commentary

Need some new swing ideas? Get free weekly swing ideas and market commentary from Jonathan Bernstein here: Swing Trading.

Explore More

Weekly In-Depth Market Analysis and Actionable Trade Ideas

Get institutional-level analysis and trade ideas to take your trading to the next level, sign up for free and become apart of the community.